Economists are now dismissing the possibility of an interest rate increase from the Bank of Canada in 2026, following the release of a tepid December jobs report that signalled a significant cooling in the nation's labour market.
Labour Market Cools After Strong Run
The Canadian economy added a modest 8,000 positions in December, according to Statistics Canada data released in early January 2026. This figure surpassed analyst expectations, which had predicted a loss of 2,500 jobs. However, the headline number masks a sharp slowdown from the torrid pace set in the previous three months, where job gains averaged a robust 60,000 per month from September through November.
Concurrently, the unemployment rate climbed to 6.8 per cent in December, up from 6.5 per cent in November. This increase was attributed to a surge in the number of people actively searching for work, with the participation rate rising by 81,000. The reported layoff rate remained consistent with historical averages for the period.
Markets and Economists Rethink Rate Hike Bets
The softer employment data prompted an immediate reassessment of monetary policy expectations. Prior to the report's release, financial markets had priced in a 70 per cent chance of a rate hike at the Bank of Canada's final meeting of 2026. Following the numbers, those odds fell to just over 60 per cent.
The central bank had previously cut its key interest rate to 2.25 per cent in October 2025, signalling that level was appropriate to support economic growth and effectively closing the door on further cuts. The December jobs figures have now slammed the door on the opposite move.
Economists' Take: A 'More Realistic' Picture Emerges
Leading economists were quick to analyse the implications for the Bank of Canada's path.
Douglas Porter, Chief Economist at BMO, described the December report as "ho-hum" but suggested it had a better "grasp on reality." He expressed prior skepticism about the "supersized gains" and the surprising drop in unemployment to 6.5 per cent in November, calling the latest data a settling correction. "Today's report will tamp down talk of a rate hike this year," Porter stated, with BMO expecting the central bank to hold rates steady throughout 2026.
Andrew Grantham of CIBC Capital Markets echoed the sentiment, noting that November's low unemployment rate was likely exaggerated by a decline in job seekers. December's rise in participation reversed that. "We see today's unemployment rate as a more accurate representation of actual slack within the economy," Grantham said. He concluded that with more people looking for work, there is "still plenty of room for non-inflationary growth" before the Bank of Canada would need to consider raising interest rates.
The consensus is clear: a slowing jobs market with increased labour force participation has effectively killed any lingering speculation about tighter monetary policy in Canada for the remainder of the year, shifting the focus firmly to how long the current pause will last.
